Share purchase or asset purchase: which is the best option?

Anyone who intends to buy a business has two ways to go about it. The first way is to buy the assets of the business or certain selected assets. The second way is to purchase the issued share capital of the business from the company’s shareholders. Which is best when buying a business, assets or shares? There are pros and cons to each option and we examine them in this article.

What is an asset purchase and how is it different from a share purchase?

A business buyer can acquire a target business by purchasing the assets of that business or certain selected assets. These may be tangible assets such as land, premises, inventory, plant and machinery, or intangible assets such as the benefit of any business contracts, intellectual property rights (including brands and logos) and goodwill. This may also require the buyer to assume responsibility for certain liabilities.

A limited company has its own ‘legal personality’, separate from that of its owners. That means that the identity of the owners can change while the identity of the company remains the same. The only assets that change hands are the shares. All assets owned by the company stay owned by the same company, so no transfers or assignments are required and business can carry on as normal.

As buying the shares of a business can potentially expose the buyer to contingent or even as-yet-unknown liabilities, many professional advisers steer their acquisitive clients towards the path of asset purchase instead. But the truth is that each approach has both advantages and disadvantages when acquiring shares, assets and liabilities

Advantages of purchasing assets

First of all, the buyer gets to pick and choose which assets to buy. Thus, the buyer has more negotiating strength. Also, the sale of assets rarely requires shareholder approval, and this leads nicely into the second advantage, which is speed. Much less due diligence is required when purchasing assets and so transactions can be concluded quite quickly. Thirdly, and for the seller, the sale may result in an allowable loss which can be set against other chargeable gains. This allowance is not available for share sales.

Disadvantages of purchasing assets

Sometimes, third-party approval is required for the sale of a particular asset. A common example is a leasehold building, the transfer of which requires the approval of the landlord. This can sometimes cause undue delay. Secondly, asset sales can give rise to complicated tax calculations as different categories of assets are often treated differently for tax purposes. Thirdly, customers and suppliers who use automated payments, online payments or recurring payments will need to be transferred to the buyer and some may not follow along. Lastly, an asset sale by the business will trigger the Transfer of Undertakings (Protection of Employment) Regulations 2006, or ‘TUPE’ for short. These regulations stipulate that the buyer will be responsible for taking on all the employees of the business on the same terms they enjoyed before the sale. Hence, the buyer should always check beforehand that they are happy with the employees and their terms and conditions.

Advantages of selling and buying shares

There are a lot of tax benefits for the seller which arise from selling the shares in a company as opposed to merely the assets. First of all, assuming the shares are sold for a higher price than the seller paid for them and assuming that the company is a trading company (or holding company of a trading group) the seller may benefit from capital gains tax ‘entrepreneurs’ relief’. Secondly, there is a potential double tax charge on asset sales which may result in the seller being taxed twice, i.e., first on the gain made from the sale of the assets and again when the sale proceeds are distributed. However, on a share purchase, the proceeds of sale are paid directly to the company’s shareholders, which may result in a lower tax liability. Thirdly, there is roll-over relief which is not always available on asset sales.

For the buyer, there are also several benefits, the most notable of which is continuity as the business merely carries on after the sale much as it did beforehand. Asset sales, even if they go smoothly, can often disrupt the smooth flow of the business. Secondly, many commercial contracts, as assets, contain prohibitions against assignment to any third party. Buying the shares negates this issue.

Disadvantages of selling and buying shares

As briefly mentioned above, there is the risk of exposure to liability not just in the present but at some indeterminate point in the future. Some liabilities are apparent and can be taken into account, but others may be contingent or as-yet-unknown, and they can lie in wait like unexploded mines. Nor can the buyer claim immunity from this liability. Hence, much deeper and more thorough due diligence is required before completing a sale purchase. Not only does this take more time but it is also going to cost both parties considerably more in professional fees as a result.

Legal Advice

There is no definitive right or wrong answer when deciding to buy assets or shares. In the end, the best solutions will depend upon the circumstances, strategies and business goals of each party. What is certain is that nobody should ever attempt to conduct a business purchase or sale without experienced, professional legal advice and assistance. These transactions can be far more complicated than they first appear and go catastrophically wrong if not handled properly.

For further information and trusted legal advice regarding corporate law, get in touch with us at Carlsons Solicitors.